IOSCO’s Emerging Markets Committee Working Group #5 (WG#5) received a mandate on verifying the existence and the level of Performance Presentation Standards (PPS) on Collective Investment Schemes on Emerging Markets.

The mandate has been developed according to the following schedule:

• The mandate was approved (WG#5 meeting during IOSCO’s Annual Meeting in Lisbon, May, 1999)
• A questionnaire (Appendix 1) has been developed and approved for distribution to EMC countries (WG#5 meeting during IOSCO’s Emerging Markets Committee Meeting in New Delhi, September 1999)
• A first analysis of the answers to the questionnaire has been analyzed (WG#5 meeting during IOSCO’s Annual Meeting in Sidney, May, 2000)
• This final report has been approved (WG#5 meeting during IOSCO’s Emerging Markets Committee Meeting, Amman, November 2000)

One key point in carrying out this mandate was the fact that the Association for Investment Management and Research (AIMR) has already set a core of principles regarding PPS, namely the Global Investment Performance Standards (GIPS), reproduced in Appendix 2. WG#5, taking this previous work into consideration, decided to focus the mandate on such standards, rather than drafting its own recommendations.

The idea of the questionnaire was therefore, aimed at the following objectives:

• verifying if Emerging Markets Committee Countries actually set domestic standards on PPS
• Verifying on what issues (e.g.: minimum period of existence, volatility, etc.) such domestic PPS aimed at
• If the usage of GIPS as a recommendation for EMC countries would actually be adequate to individual countries.

Until March 2000 only 17 countries answered the questionnaire. It is important to stress that these answers constitute a very low sample (24%) compared to the 70 members of the Committee. Therefore, WG#5 in the May 2000 meeting decided to seek for more answers. However, only one additional member answered the questionnaire until October 2000, leading our total sample to 18 countries.

One of the 18 countries, however, answered that it was still designing its framework for mutual funds, and therefore, was not able to answer the questionnaire. Thus, our final sample that is going to be analyzed in this paper of 17 countries: Albania, Argentina, Bahamas, Brazil, Hungary, Latvia, Malaysia, Paraguay, Peru, Poland, Singapore, South Africa, Thailand, Tunisia, Turkey, Uruguay and Venezuela.

Again, not only is this sample low but also geographically concentrated. More than 1/3 of the sample (6 countries) is from South America. On the other hand, we may assume that many of the not answering countries are countries from new economies, which are still in a stage of developing the basic regulatory framework for mutual funds. Considering that the usage of PPS standards require a certain maturing of the mutual fund industry, It is likely to assume that PPS standards are still not addressed in the majority of the non-answering countries.

The next section will analyse the responses to each of the questions individually. Please note that to decimal rounding, some answers may sum 101% rather than 100%.

Usage of PPS standards is prescribed in 59% of the jurisdictions. Of those, 6% require its use only in the prospectuses, 29% on some advertisement and 24% in all advertisement material. In addition, 6% of the jurisdictions recommend the PPS usage. 12% do not address the issue at all, while 24% stated that other conditions apply. Jurisdictions that answered "other" in this question addressed the issue as following:

• regulation on the issue is being developed in one country
• the second country stated that the investment company should prepare annual and six-month reports of the Fund. In these reports, a comparison with the previous period shall be included.
• The third country answered that certain conditions related to the date of the authorization of the fund shall be observed for marketing.
• The last country answered that PPS standards depend on the type of the fund

Graphic and table of the answers to question 1 are found below:

The countries which answered that changes were being considered, mentioned the following areas for change: disclosure, standardisation on presentation results (mentioned by two countries), setting or improving advertisement rules (mentioned by four countries). Examples of this last item include code of advertising improvement and the introduction of a mandatory disclaimer in all advertisement mentioning the existence of the prospectus.

One country (Latvia) mentioned specifically that it wishes to incorporate GIPS into domestic legislation.

In the majority of countries (53%), PPS regulators are set by their corresponding national securities regulator (defined as SEC in the table below). PPS are set by Law in two countries (12%), while the same number of countries mentioned SROs as the entities responsible for setting such standards.

Performance is not set in three countries (one of those mentioned the fact that the manager set the standards). The "other" answer referred by Malaysia refers to the fact that the local securities commission regulates only issues on advertisement.

The standardisation of the performance period is not required in 41% of the countries and is required in 59% (10 countries). In addition, the minimum period of operation required before the fund presents its performance to the public ranges from 6 months to 5 years, and averages nearly one year and seven months.

However, the usage of such minimum period of operation varies: 12% require it is presented only in the prospectuses, 41% in all advertisement material and 6% in some types of regulated advertisement. This answer, as stated by turkey, refers to the fact that only advertisement including comparisons must comply with this rule.

This question was only answered by those who answered yes in question 4.1. This means 10 countries or 59% of the sample.

In this question, multiple answer was allowed. This means that a country which assigned both 6 months and 1 year period, require both information to be presented. 5 countries assigned the mandatory usage of one single period. In three of those, the period chose was one year.

4 countries actually require more than one period to be presented. In case of Singapore, this includes 3 month, 6 months, 1 year, 3 years and 10 year periods of performance. The "other" answer mentioned by Brazil refers to the fact that a last 6 months period (not necessarily July or December) is required for performance presentation purposes.

5 countries (50% of the 10 countries to which this section apply and 30% of the total sample) also address the mandatory comparison of the fund with an assigned market benchmark, which allows to potential and actual unitholders to see if the fund outperforms the market. The mandatory usage of graphs and tables as an assigned format has been mentioned by one country each.

This issue was addressed by 6 countries (60% of the 10 countries which answered question 4.1 and 35% of the total sample).

Of these countries, 2 stated that marketing is not allowed. Of the remaining four that allow marketing, 1 mentioned that a disclaimer must be provided and one stated that the advertisement. The remaining 2 mentioned both conditions should be fulfilled.

Note: According to the direction of the original questionnaire, this question was only supposed to be answered by countries answering yes to question 4.1. However, in order to allow comparison of the whole set of countries, those not answering were included as "not addressed".

This problem was addressed again by 6 countries (60% of the 10 countries which answered question 4.1 and 35% of the total sample).

Five countries require a minimum period operation before marketing is allowed, ranging from four months to one year. In three of those countries, an additional disclaimer is also required.

Note: According to the direction of the original questionnaire, this question was only supposed to be answered by countries answering yes to question 4.1. However, in order to allow comparison of the whole set of countries, those not answering were included as "not required"

However, only one country mentioned that it requires the mandatory presentation of volatility by its mutual funds. In Singapore, the presentation of standard deviation of the returns is required for 1, 3 and 5 year period.

The main reason that other countries may not address this issue is the fact that the concept it is rather difficult to understand by the average investor, which could be solved through investor education.

N/R= Not required

*The same period informed in question 4.2

SD= Standard Derivation

Benchmarking is the usage of a market index to compare with the fund. For 53% of the countries benchmarking is not required and for 23% it is only recommended.

The issue is addressed in other 23% (four countries). In one of those, the benchmark must be approved by the regulator, while in the remaining it is freely set by the fund.

One of those four countries mentioned that benchmarking must be used in the prospectus only, other that it is required in certain advertisement and two require the usage in all advertisement. If the benchmark changes, three countries require that a letter to the shareholders must be send in order to inform the change.

The totality of the countries requires disclosure of the management and performance fee. Except for one country, this situation is also applicable for entry fees.

15 jurisdictions (88%) require changes in the fees to be disclosed, either through newspapers, letter to the shareholders or other media, including a combination of those in 7 countries.

The performance fee, levied to the manager when a fund outperforms a benchmark, should be calculated net of other expenses. This was addressed by 6 countries (35%), which require single or multiple exclusion of other fees.

A management firm may actually manage more than one fund. Such company may only present performance of the best fund it manages, and in this case, the public does not have an idea on the average capability of the manager. When a manager is required to disclose all funds it manages within a certain category, this is called firm composites regulation.

In our sample, this issue is only regulated in Brazil, which requires all funds in the same category to be disclosed in advertisement material, all of them in a minimum period of six months statistics.